banked allowances for compliance when the PFC applies, then only a portion of the source's banked allowances can be surrendered on the customary 1:1 basis (one allowance for each ton of emissions). If additional allowances must be withdrawn for compliance, then allowances will be used on a 2:1 basis (two banked allowances for each ton of emissions). The PFC ratio is calculated at the beginning of each Ozone season. The PFC ratio is calculated as follows:
Year 2002 PFC Ratio = (0.10 x total NOX budget for 2002 season)/total no. of banked allowances (i.e. 1999 through to the end of 2001)
The PFC ratio for 2002 was 0.27. What this means is that if you hold 100 vintage allowances (i.e. you have banked 100 allowances over the course of the1999, 2000, 2001 ozone seasons) at the end of 2002 season, you can use the first 27 banked allowances at a 1:1 rate for 2002 compliance. The remaining 73 banked allowances can only then be used at a 2:1 rate for 2002 compliance. Effectively this means that the yield of having 1999, 2000 and 2001 allowances for use in 2002 is 0.635 (0.27 + [1 -0.27]/2) i.e. each banked allowance now permits its holder to only emit 0.635 of a ton of NOX.
Performance of the NOX Budget Trading Program
Allowance transfer activity can involve three main components: transfers to or from the state as part of the allocation or surrendering of allowances; transfers within a company or between related entities; and transfers between separate economic entities. The latter transfers were categorised broadly as "economically significant trades". Economically significant trades represented about half of the total trades in the programme. The volume of allowances traded that can be categorised as being economically significant was just over 50,000 in 1999, 70,000 in 2000, slightly above 110,000 in 2001 and 90,000 in 2002 (LUKE - stick in source from econ inst). These transactions provide the strongest indicator of true market activity because they represent an actual exchange of assets between unaffiliated participants. The volume of economically significant trades generally increased from year to year. These trades included only Phase II allowances (vintage years 1999-2002), and the trading volume remained high even in 2002, the final year of Phase II.
An analysis of market prices (see Footnote2) from the programmes inception indicates that the early trading prices for NOX allowance credits for vintage 1999 allowances ranged from $1,500 to $3,000. Prior to the beginning of the 1999 ozone season, prices for vintage 1999 allowances spiked at over $7,000 per ton because of initial fears that there would be a shortage of allowances. By the end of 1999, prices for both vintage 1999 and 2000 allowances had fallen to less than $1000 per ton as fears of a shortage were allayed. From April 1999 through December 2002, the price for vintage 1999, 2000, 2001, and 2002 allowances generally converged to a level of less than $750 per ton.
Over the course of the four years of Phase II the NO X allowance bank increased steadily in size.
The ability to bank allowances encouraged early emission reductions below budget levels. As the OTC states made the transition to a broader trading program under the EPA's NOX SIP Call in 2003, only a portion of the banked allowances were being permitted to be carried forward for compliance requirements in future years. As part of the EPA's NO X SIP Call, the EPA made available a pool (what size) of allowances that states could use to reward early reductions (or to allow for delayed implementation if sources faced hardship in meeting the initial compliance deadline). Many of the OTC states established a process to provide SIP Call allowances from this "compliance supplement pool" in exchange for banked OTC allowances held by units in the applicable states. The total compliance supplement pool for all the OTC states was less than 25,000 allowances (what was exact figure), while there were over 90,000 NOX Budget Trading Program banked allowances. Because the total banked allowances in the OTC states' share of the compliance supplement pool is far less than the total banked allowances, many of the early reductions that those banked allowances represented were made permanent upon transition to the NOX SIP Call.
Because of the size of the allowance bank, the PFC provision was in effect since 2000, and emissions in the first four compliance seasons did not exceeded budget levels. These results indicate that the PFC may help to avoid accidences of the NOX budgets. Because the NOX SIP Call trading programme has similar flow control provisions, the EPA and the OTC states were able to continue monitoring the effects of this incentive mechanism.
The OTC NOX Budget Program produced emission reductions well below required levels, with these reductions occurring throughout the region. OTC NOX Budget sources reduced their regional ozone season NOX emissions in 2002 by nearly 280,000 tons, or about 60 per cent, from 1990 baseline levels (1990 baseline was 473,000 tons). In each of the four ozone seasons in Phase II emission levels were considerably below permitted levels.
Allowance Allocation (Budget)
Emission Levels (Tons)
The decrease in the budget from 1990 to 2000 reflects the allocation of credits for reducing emissions prior to the start of the trading programme in 1999. The slight increases in the 2001 and 2002 budgets and emissions resulted from the delayed entry of the District of Columbia and Maryland into the programme.
Cost effectiveness is a common measure for comparing the costs of reducing a ton of emissions under different regulatory programmes. With regards to NOX, since 1990 the EPA has used $2000 per ton of reduction ($2,600 in 2000 dollars) as an upper limit for evaluating highly cost effective NOX control strategies. While it is difficult to determine the actual cost of the OTC NOX Program, there are indicators that costs were significantly below the EPA's highly cost effective cut-off of $2,600 per ton.
Before the OTC NOX Budget Program, a study for the EPA (reference study) projected that the compliance costs for Phase II of the OTC NOX Budget Program would result in an approximately $60 million annualised costs, approximately $38 million for add-on control equipment and $22 million for operating costs. This study projected that the average cost per ton of NOX reduction would be approximately $1,200 per ton.
The 1995 EPA study acknowledged that it probably underestimated projected annual costs by approximately $10 million. The study showed that the compliance costs under the trading programme would be far lower than a "no trading" scenario, where the total annual costs of installing add-on control equipment were projected to be over $130 million (2000 dollars).
Another indicator of the cost of the programme is the price of allowances. Since a source can choose to buy allowances instead of reducing NOX emissions, the price of an allowance should indicate the marginal cost that a source would have to pay to reduce an additional ton of NOX. Once the OTC NOX Budget Program established itself by the end of 1999, allowance prices ranged from $600 and $1700 per ton and were generally less than $1000 per ton. Assuming these allowance prices represent the marginal cost of the programme, the average cost of a ton of NOX reduction under the programme would appear to be lower. Given that allowance prices for the programme after 1999 have been well under $2,600 per ton, it appears that, once the OTC NOX Budget Program was established, it was highly cost effective and was certainly less costly than a "no trading" programme would have been.
Ozone Transport Commission (2002): NOx Budget Program, 1999-2002 Progress Report · Clean Air Markets Division, United States Environmental Protection Agency (2003):
2002 OTC NOx Budget Program Compliance Report Useful Information Sources.
The following websites provide additional information on the OTC programme: · http://www.epa.gov/airmarkets/otc · http://www.otcair.org
 Once formed, ozone targets the respiratory system, aggravating asthma, increasing susceptibility to respiratory illness such as pneumonia and bronchitis, and contributing to permanent lung damage. In addition it can also damage forests, reduce the produce of agricultural crops and lead to the decay of monuments and buildings.
 The ozone season runs from May 1 to September 30 each year.